DEBENTURES Section 2 of the company act defines debentures as including debentures stock, bonds and any other securities

of a company, whether consisting a charge on the assets of the company or not. The section does not actually describe what a debenture really is. In Level vs. Abercorris state and slab Company (1897) 37 ch D 260. Debenture was defined as a document, which either creates a debt or acknowledges it. In Edmonds vs. Blaina Co. (1887) 36 ch. D 215 chitly S. debenture was defined. The term itself imports a debt an acknowledgement of a debt an obligation or covenant to pay. This obligation or covenant is in most cases accompanied by some charge or security. A debenture is thus an acknowledgement in writing a debt by a company to some persons and it is issued to the public by means of a prospectus. The prospectus has provisions for interest payment and repayment of loans lenders are usually given a security against the non-repayment of their loan, by a charge against the assets of the company. Characteristic features of a debenture In Lemon vs. Asustin Friars investment Trust Ltd (1926) ch. 1 debenture was defined as follows a debenture is a document containing an acknowledgement of indebtedness which need not be, although it usually is, under seal, which need not give, although it is usually does give a charge on the assets of the company by way of security and which may or may not be one of the services. The following are characteristics of a debenture: 1. It is used by a company and is usually in the form of a certificate. 2. It is issued under the companys seal. 3. It is one of a series issued to a number of lenders although there can be a single debenture, for example a mortgage of a companys property to a single individual. 4. It specifies the period and date of repayment.

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It creates a charge on the undertaking of the company or parts of the

company property, but this is not always necessary. 6. Debenture holders do not vote in company meetings.

Debenture stock A debenture stock is borrowed capital consolidated into a unit with each leder having a certificate entitling him to a certain sum being a portion at one large loan. The debenture stock is usually secured by a trust deed and in case there is no charge, the stock is called unsecured loan stock. Debenture stock can be issued directly as such it is not necessary for an issue of debentures to be fully paid and then turned into stock.

Classes of debentures Debentures are classified according to the following characteristics: 1. Negotiability 2. Security 3. Convertibility 4. Priority

1. Classification according to negotiability a) Bearer debentures These are also known as unregistered debentures and are payable to the bearer. These are negotiable instruments and are transferable by delivery and a bonafide transferee for value is not affected by the defect in the title of the prior holder. In Bechuanaland Exploration company vs. London Trading Bank Ltd (1898) 2 QB. 648 Co. held debentures of an English company, payable to bearer. It kept them in a safe of which the secretary had the key. The secretary pledged the debentures with a bank security for a loan taken by him. The bank took the debentures bonafide. It was held that the bank was entitled to the debentures as against the company. Page 2 of 6

b) Registered debentures These are debentures payable to registered holders. A holder is one whose name is on the certificate and in the companys register of debentures. A registered debenture is issued under the seal of the company and contains the following clauses: (i) (ii) (iii) A covenant to pay the principal sum. Covenant to pay interest. A description of the charge on the companys

undertaking property. (iv) A statement that is issued subject to the conditions

endorsed thereon.

2. Classification according to security a) Secured debentures These debentures create a charge on the property of the company. The charge may be fixed or floating. b) Unsecured or naked debentures These do not create any charge on the assets of the company.

3. Classification according to permanence a) Redeemable debentures These are issued on condition that they shall be redeemed after a given period. b) Irredeemable or perpetual debentures These are debentures with no fixed period for repayment of the principal amount or repayment of it is made conditional on the happening of an event which may not happen or may happen is specified events like winding up. c) Debentures with Pari Passu clause These are debentures payable ratebly, though issued at different and varying times. When assets are insufficient to pay all debts the debentures rank proportionately. If there is no Pari passu change in the terms of issue, debentures are payable according to the date of issue. Page 3 of 6

A company cannot however issue a new batch of debentures to rank Pari Passu with an on batch.

Debentures trust Deed Debenture holders may appoint persons as their trustees. When the trustees are appointed a trust deed is executed conveying the property of the company to the trustees. Under the terms of the deed the company commits itself to pay the debenture holder their principal and interest and charges its property to the trustees as security. The trust deed contains the terms and conditions endorsed on the debentures and defines the rights of debenture holder and the company. It empowers the trustees to appoint a receiver to protect the interest of debenture holders. Other contents of debentures are provisions concerning meetings of the debenture holders, supervisions of the assets charged and the keeping of a register of debenture holders. Incase of default by the company the trustees take action on behalf of the debenture holders. Advantages of the trust deed 1. it gives trustees a legal mortgage over the companys property. 2. Trustees Act are at better position of safeguarding the interests of the

debenture holders. 3. it specifies the events upon which principal and interest are payable and trustees ensure that the money is paid. 4. The company is given power to deal with its own property advantageously for the purpose of its business without prejudicing the interests of debenture holders. 5. The trustees act as watchdogs for the debenture holders. 6. The trustees have power to appoint a receiver to run the company. 7. In case of doubt or contingency the trustees can call a meeting of

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In case of default by the company the company can act to protect

debenture holders.

Liability of trustees A trustee is liable for any breach of trust where he fails to show the degree of care and deligence required of him as trustees. Any clause in the trust deed releasing the trustee exempting him from liability for breach of trust or indemnifying him against liability for breach of trust is void except in the following cases. 1. Where the trustee can show that he took such care and deligence as is required of him as trustee. 2. Where the trustee acted honestly and reasonably, section 402. 3. Where a majority of not less than th in value of the debenture holders present and voting in person or where proxies are permitted by proxy at a meeting summoned for the purpose, agree and the voting relates to specific Acts or omissions or to a trustee who is dead or has ceased to act. Rights to copy the trust deed A registered debenture holder is entitled to require a copy of a printed trust deed section 89 (2). Priority of charges 1. A fixed charge over the same assets has priority over the floating

charge. 2. Specific charge first in point of time takes priority. 3. A company is prohibited from creating mortgages ranking in priority after crystallization of floating charge. On crystallization of floating charge becomes a specific mortgage. 4. A company is prohibited from creating a second floating charge having priority over the first. 5. A company can create a specific charge after a floating charge. Page 5 of 6

Floating charge is postponed to the rights of the following persons if they act before the security crystallizes. a) A landlord who distrains for rent b) A judgement creditor, if the goods are sold by the sheriff. c) A creditor who obtains a garnishee order absolute d) A supplier of goods on hire purchase agreement has priority over such until goods are paid for in full. e) Preferential debts e.g. rates, taxes, wages and salaries.

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